Is Whirlpool Stock Still Attractive After A Solid 3x Rally?

WHR: Whirlpool logo
WHR
Whirlpool

Whirlpool’s stock (NYSE: WHR), a manufacturer and marketer of major home appliances, is about 2.8x higher than the levels on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This compares with a 68% rise for the S&P over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. Whirlpool was able to beat market expectations on revenue and earnings in all four quarters of 2020, which led to its stock rally – despite a revenue decline of almost 5% year-over-year in 2020. Going forward, we expect Whirlpool’s stock to grow further on the back of its EBIT (earnings before interest and taxes) margin expansion (regardless of the drop in sales). The appliance market is extremely mature and difficult for newcomers to disrupt, which is actually a strength for Whirlpool. Our dashboard,What Factors Drove 27% Change In Whirlpool Stock Between 2019 End And Now? provides the key numbers behind our thinking, and we explain more below.

Whirlpool’s stock grew 22% from around $148 in 2019 to roughly $180 in 2020. Over this period, the company’s revenues saw a slump of close to 5%. This was primarily due to the divestiture of the Embraco compressor business, lower volumes due to Covid-19, and unfavorable foreign currency, partially offset by the favorable impact of product price/mix. In addition, earnings per share (EPS) shrunk more than 7% during this period, driven by a net margin decline of 4%.

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Whirlpool’s stock price during the 2019-2020 period grew largely due to favorable changes in its P/E multiple. This value grew from around 8x in 2019 to 10.5x in 2020. While the company’s P/E is now 10.8x, we expect the company’s multiple to grow further on its market leadership and a stronger outlook for 2021.

So what’s the likely trigger and timing for the further upside?

Whirlpool’s sales product mix shifted in the direction of large appliances, due to selling more freezers, microwaves, lower-end refrigerators, washers, and dryers during the pandemic. While the Covid-19 reduced Whirlpool’s revenue and earnings in 2020, the negative impact was partially mitigated by significant cost reductions. It is worth mentioning that the company saw its gross margins climb 250 basis points (bps) y-o-y and EBIT margins grow 310 bps y-o-y in 2020, driven by a favorable impact of product price/mix, cost reduction initiatives, raw material deflation, and a gain on sale-leaseback.

Looking ahead, Whirlpool sees full-year revenue growth of around 6% (excluding currency fluctuations) and free cash flow of at least $1 Bil. The company also hinted at an increase of 4% to 10% in GAAP earnings in 2021. It also expects to sustain its EBIT margins going forward, driven by a robust demand environment for North America – supported by continued strength from consumer nesting trends and increased discretionary spending.

While WHR stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Home Depot vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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